Peristimulus inhibition in sensory pathways is generally attributed to lateral inhibitory connections. However, in the neocortex circuitry is incompletely understood at present, and in some cases there is an apparent mismatch between observed inhibitory effects and intracortical inhibitory connections. This paper studies the hypothesis that an additional mechanism, competitive distribution of activation, underlies some inhibitory effects in cortex. Analysis of a mathematical model based on this hypothesis predicts that per stimulus inhibitory effects can be caused by competitive distribution of activation, and computer simulations confirm these predictions by demonstrating Mexican Hat patterns of lateral interactions, transformation of initially diffuse activity patterns into tightly focused "islands" of activation, and edge enhancement. The amount of inhibition can be adjusted by varying the intensity of the underlying competitive process. The concept of competitive distribution of activation provides an important perspective for interpreting neocortical and thalamocortical circuitry and can serve as a guide for further morphological and physiological studies. For example, it provides an explanation for the existence of recurrent cortex-to-thalamus connections that perform a logical AND-operation, and predicts the existence of analogous neocortical circuitry.